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Grocery Outlet Holding Corp. could become the go-to supermarket for many bargain-hunting new customers who find food prices rising elsewhere, Cowen analysts say.
Grocery Outlet GO, +2.23% is an “extreme value” supermarket chain with 350 stores across California, Pennsylvania, Washington and a few other states. The grocer reported a 25% jump in sales during the first quarter.
Grocery Outlet stock began trading in June 2019.
“The current COVID-19 environment is driving many first-time shoppers to Grocery Outlet, many of whom we anticipate will be converted to long-term customers,” wrote Cowen analysts led by Oliver Chen. “In the near-term we expect a continued benefit from a share shift from restaurants and other channels, while longer-term we anticipate a challenging macro environment will drive shoppers toward greater values.”
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Among the reasons for the upbeat outlook are the treasure-hunt experience of shopping at Grocery Outlet stores, investments in social media and marketing, and the deals Grocery Outlet offers.
Cowen analysts say products at Grocery Outlet can be priced as much as 70% lower than items found at competing stores, and entire baskets can be as much as 40% lower. Grocery Outlet prices even outdo discount grocery retailers by as much as 20%, Cowen said.
“Additionally, we are encouraged Grocery Outlet continues to see widened price gaps as peers are pulling back on some of their promotions, creating greater value for shoppers.”
Cowen gives Grocery Outlet high marks for its sourcing, calling it “flexible” and “opportunistic.” Analysts rate the stock outperform with a $48 price target.
Grocery Outlet has capitalized on the shift in food sales and consumption during the COVID-19 outbreak, said RJ Sheedy, president of the company, on the earnings call.
“These include suppliers that distribute through foodservice, restaurants, department stores, and airlines and airports, just to name a few,” he said, according to a FactSet transcript.
“Imbalances between supply and demand have and will continue to occur. We have already begun to benefit from some of these imbalances and we expect to see more opportunities in the future.”
Shoppers may start to notice higher grocery prices at other stores, with food companies pulling back on promotions. Conagra Brands Inc. CAG, +2.09% is one of the companies that has said it is working with retailers to reduce the number of discounts.
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Meat prices could soar too, as shortages caused by supply chain disruptions continue. CoBank, which serves “vital” industries in rural America, estimates that meat supplies could shrink as much as 30% by Memorial Day, and prices for pork and beef could go up as much as 20% year-over-year.
“[W]e’re more of a relative pricing model, so we’re maintaining our pricing spread relative to others and delivering that value on the basket and then even deeper value on specific items,” Sheedy said.
Grocery Outlet stock rallied as much as 7% in Tuesday trading, closing up 2.2%. Shares are up 15.3% for the year to date. The S&P 500 index SPX, -2.05% has fallen 11.2% for 2020 so far.
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